A Wisconsin bank can't collect on a dealership co-founder's $3 million personal guaranty even though the dealership defaulted on floorplan and real estate loans, a Wisconsin Court of Appeals panel has ruled.
Mid-Wisconsin Bank can't enforce the guaranty because it didn't obtain a first-lien position on the assets subject to the loans as promised, the three-member panel ruled.
The unanimous decision clears Richard Smith, co-founder and a shareholder of the now closed dealership, of potential liability.
In 2005, Smith Brothers Ford Inc. in Mosinee, Wis., needed refinancing. Its lender had declared the store in default after discovering that collateral had been double-financed. Smith applied to Mid-Wisconsin Bank to refinance its obligations.
After a loan appraisal, Mid-Wisconsin approved more than $9 million in refinancing, with inventory and real estate as collateral and a $3 million guaranty signed by Smith. At the time, the bank's commercial loan officer told Smith and his son, the company president, that the bank would obtain first-lien position on the dealership's collateral by paying off a prior loan from Advantage Community Bank.
Later, however, it was discovered that Advantage was still in first position on the collateral with $1.7 million in loans. Mid-Wisconsin's loan officer claimed that his failure to obtain the first-lien position was an oversight. Even so, he was terminated for negligence.
After Smith Brothers Ford defaulted on Mid-Wisconsin's loans, the bank sued Smith to recover on his guaranty. A Marathon County Circuit Court judge ruled against the bank and rescinded the guaranty.
In affirming that decision, the appeals court said the bank "concedes its agent falsely represented that Mid-Wisconsin would obtain first priority on the business collateral" and that Smith stated under oath that "he would never have agreed to the guaranty if Mid-Wisconsin had not assured him it would obtain first position on the business collateral."
The court said Smith was entitled to rely on the loan officer's statement and that "the misrepresentation dramatically altered Smith's calculation of the transaction's risk."
Smith's lawyer, Randall Nesbitt of Sturgeon Bay, Wis., said the decision means that a lender's "failure to act aboveboard is going to release guarantors from their obligations."
The bank did not appeal further, and the time to appeal has expired, according to the bank's lawyer, Mark Sauer of Wausau, Wis.
Sauer also said the appeal didn't affect a $4 million-plus jury award the bank won against Smith's son, company president, and Smith's daughter, company principal, for intentional misrepresentation and conspiracy. The time to appeal has passed, Sauer said, adding that the award still hasn't been paid.